Europe's Latest Rescue Deux Ex Machina: A CDO... SQUARED

Steve Liesman has just broken news of the latest European bail out mechanism which will likely push risk higher for at least a few hours. Why just a few hours? Because what according to Liesman the ECB is about to propose, is nothing short of not just a CDO, but a CDO SQUARED. We are still waiting for more information, but according to his description of what this last ditch bailout bazooka (before Eurobonds of course), is that the ECB will take the debt bought by sovereign governments and will issue EURs against EFSF/ESM bonds as collateral: this is in its simplest definition, a CDO Squared (because as we have described in the past, the EFSF is simply a CDO), which in turn means that the systemic leverage of the Eurozone is about to rise 8-fold. If you thought the capitalization of the ECB was bad before, you ain't seen nothing yet. Expect cubed and quadratic iterations by the end of the week when the half life of this latest bailout rumor dies out. Oh, and expect many more headlines out of Europe talking about bailouts and hyperinflation as noted earlier.

The EUR stalwarts thought I and many others had some sort of personal or emotional grudge (it's not personal, and I have no emotional fixation on any paper fiat, whether the EUR or USD) against the EUR whenever I've voiced the opinion that the EUR is doomed partly, but in no small manner, because the European Union is doomed, and vice-versa.

If they follow through on this, as it's being reported, it's night-night EUR, sleep tight.

Stay strong, Barb. This market is so twisted I wouldn't use Ben B.'s money in it. The market is down a scant 8.5% year to date, not including dividends, while Europe is exploding, while LSAP is off, while China's market falls apart, while the DAX, FTSE, and CAC are all down 30%.....we're in the middle of the greater depression.....and yet....stocks are down just a mere 8.5%, which can be saved every other day by typing in "greece saved" rumor mill in google.

Seriosuly, who is buying all this horseshit at this stage of the game? Puh-lease, raise your hand for us if you're human and buy these rallies?

Sorry to jump the line by replying: The EIB is an EU institution, not a Euro-Zone institution. It's senior executives, many of the eight key VP's, have been dying to make EIB the vehicle to launch a Euro-Bond. They've been agitating to do it for months. This latest "rumor" just shows innovation and doggedness of their part. Still trying. The positions at the top are plumb jobs filled with party loyalists for 10 year terms, rotating between EU nations. I would suppose the majority are extremely Europhile and majority socialist of various sorts. If they don't get a fiscal union then their dreams are crushed, one supposes. Who knows what outcome will result? No one. Some seem to do more thorough and frequent Bayesian updates than others, clearly. Others live on passion and hope. Oh, and change.

Yeah, this is pretty much it. The EFSF buys bonds and so the participants are kinda owners pro rata in a CDO that contains bonds. However, there's no tranching that I can see. Not like Germany puts in more money and gets a senior cut of the repayments. That makes it more like a vanilla MBS pool.

This new SPV would be a real CDO. A squared CDO would be a vehicle built out of tranches, itself re-tranched.

If they do this right, they will aggregate sovereign bonds and then sell slices of them on seniority ranks, with differing yields and payment hierarchy...iow, a real CDO. That becomes the supranational securitization of sovereign debt.

Once those tranches are out there floating around, someone can then aggregate them and retranche and make the whole system blow the fuck up. I told Douchinger that if YOU didn't request the credit that the gov't would on your behalf.

They are definitely serious, 17 versions of serious and with lots of votes behind them despite their general disdain for constant injections of democracy into the deliberations. We've seen stranger things happen than a temporarily-successful Union that pulls every lever imaginable to get one more breath. It can go on longer than many imagine. And obviously there is a lot of Imagining going on. "Imagineering," laugh. Lots of these people, EU EZ psuedo-mandarins are intense political pros, but not really finanical pros. And they have political theories. Heard this bit before? Back when the currency union was founded?

Yep, pimping this shit is right, just to get the crowd from Luxembourg to stop auto-dialing. There's some seriously wonderful bureaucratic careers coming along, and jobs for the next generation, if they can just pull off this really big EU EZ thing and get some real "give us your money, punk" tax revenue headed their way. None of this Italian revenue to pay Italian debt...gotta hand some of that over, Guido! Consider it a fee to the EU EZ EIB, much like Citi might ordinarily charge...move along little man. I think it may well in the end appear like a bit of America by the time they're done, a sort of Norman Rockwell painting with Euro models. An interpretation of our deal where the money and rule-making all flow to this center of government, DC. It is extremely green this bit, because the lobbyists don't have to travel so far, nor the bag men. Really, it works.

Steve LIESman is going to do shitarine commercials (shitarine being a butter substitute), wherein he'll take a big, juicy bite of feces spread on toast, and feign surprise as he tells his wife that "I can't believe it's not butter!"

"Under its Statute, the Bank is authorized to have maximum loans outstanding equivalent to two and a half times its capital which is contributed by Germany, UK, Italy, Spain and France....150 of the 230B or so of capital commited. Implies somthing like 150B of lending capacity net of loans to be distributed?

Each Member State’s share in the Bank’s capital is based on its economic weight within the European Union (expressed in GDP) at the time of its accession"